Victory Capital Holdings Inc

NASDAQ:VCTR

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen and welcome to Victory Capital's Fourth Quarter 2018 Earnings Call. [Operator Instructions] As a reminder this conference is being recorded.

I would now like to turn the conference over to Matt Dennis, Director of Investor Relations. Sir, you may begin.

[Matt Dennis, Director of Investor Relations]

Thank you, Sherlyn. Good morning. I would like to introduce myself. I am Matthew Dennis, the new Director of Investor Relations for Victory Capital, and I am thrilled to be joining Victory at such an exciting time. Before I turn the call over to David Brown, I would like to note that today's discussion may contain certain forward-looking statements, and as such, includes risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion.

While a recording of this call will be made available by us on our website, any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these forward-looking statements to reflect new information or future events that occur or circumstances that exist after the date on which they were made.

In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to Generally Accepted Accounting Principles. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliations between these GAAP and non-GAAP measures are included in the tables found in our earnings release and the slide presentation accompanying this call, which can be accessed on the investor relations portion of our website located at ir.vcm.com.

Now I would like to turn the call over to David Brown, Chairman and CEO.

[David Brown, Chairman and CEO]

Thanks, Matt. Good morning and welcome to Victory Capital's fourth quarter 2018 earnings call. I am joined today by Terry Sullivan, our Chief Financial Officer, and Mike Policarpo, our Chief Operating Officer, as well as Matt Dennis, our new Director of Investor Relations.

I'm going to spend a few minutes discussing our fourth quarter results as well as some business highlights. Then I will turn it over to Terry, who will review our financial results for the quarter in more detail. Following our prepared remarks Terry, Mike, Matt and I will be available to take questions.

Will start on Slide 5, I'm pleased to report that Victory Capital delivered strong investment and financial performance during the fourth quarter. The fourth quarter was a period of unprecedented volatility and we experience a significant market pull back especially during December. Strong operating margins, cash flow generation and expense control during the volatile quarter highlighted the strength and sustainability of our integrated multi-boutique business model. Our model provides diversification across asset classes, investment return streams, product types and business channels and has enabled us to build scale and operations administration and technology.

As a result, we've been able to continue to reinvest efficiently in this business and allocate the resources necessary to speak to provide superior returns and service to our clients and our investment franchises.

Starting with investment performance 57% of our AUM outperformed its respective benchmarks over the trailing one year, 68% over the three-year, 74% over the five-year and 88% over the 10 year periods ended December 31, 2018.

Total AUM decreased to 52.8 billion as of December 31, 2018, due primarily to market depreciation. Gross flows for the quarter were strong at 4 billion while net flows were negative 1 billion as many investors retreated from higher risk asset classes and rotated into cash. Going into December, we were net flow positive for the quarter as a firm. With the market volatility and dislocation that intensified in December, we saw elevated levels of redemption in the asset classes we manage, which resulted in our flows for the quarter.

Moreover, the fundings of some of our won but not yet funded accounts were pushed back into 2019. That said, we are pursuing a more normalized environment in 2019 and in fact preliminary assets under management have climbed back to approximately 57 billion as of the end of January. Overall our pipeline for 2019 is healthy as are our sales prospects, fueled by our investment performance and diverse product sales.

[Indiscernible] our Victory shares ETS remain strong with net flows of 121 million for the quarter and 1.1 billion for the year ended December 31, 2018.We continue to think Victory shares represents an exciting and differentiated part of our product platforms. Looking ahead, we intend to grow organically by leveraging the diverse capabilities of our investment franchises and our solutions platform coupled with a well-established distribution system. Our organic growth potential be impacted somewhat by the investing environment which as I stated earlier, has begun to normalize which is quite encouraging. We also intend to grow inorganically through acquisitions and believe the consolidation of the industry will only increase in the years to come.

We believe we are as well positioned as any firm in the industry to benefit from consolidation given our platform and our experience. On that front, we announced two acquisitions in 2018 in September, we announced plans to acquire Harvest Volatility Management and in November, we announced plans to acquire USAA Asset Management Company, which includes its mutual fund ETF and 529 college savings plan businesses. Together these two acquisitions will significantly diversified our AUM and investment capabilities and add many new and distinct products to our current lineup. We will also give a substantial opportunities to expand our distribution platform, including the addition of the direct channel for USAA members.

The acquisitions will transform our business in terms of size and scale plus giving us the ability to continue to reinvest at a pace that will prepare us for the future during this phase of rapid change for our industry. Both Harvest and USAA Asset Management performed as expected in the fourth quarter given the difficult market environment. Harvest did experience an investment performance drawdown for some of their investment strategies but this performance was comparable to other like investment strategies. Harvest's flagship strategy CYES was competitive relative to its benchmark. We believe the Harvest investment products continue to serve as an important component of a well diversified portfolio built for the long-term.

Generally speaking, USAA's investment strategies held up nicely during the volatile quarter and illustrate the power of the product set that is well diversified across a number of different asset classes. We are excited to bring this group of products from Harvest and USAA to our platforms and offer them through our distribution system.

Plans to integrate Harvest and USAA Asset Management Company are on track. Each firm's mutual fund Board of Trustees approved the respective transactions, which is a step in bringing the transactions to close.

Additionally, mutual fund proxies for both transactions have been filed with the SEC and will come to market shortly. Specific to USAA, the Board of Trustees of USAA mutual funds trust approved the addition of several Victory Capital investment franchises, and our solutions capabilities to provide investment management services to specific USAA funds. As well as an alignment of certain service providers that support our integrated multi-boutique model.

As Terry will go through later, we had committed financing for both transactions and we are on schedule to execute on these transformational acquisitions. This includes our ability to accomplish the $100 million synergy goal within the timeframe that we initially laid out at the announcement of the USAA transaction. Based on the information, we have at this point, we expect to close both of these transactions in the second quarter of 2019.

We view as the current market dynamics support consolidation to M&A, as firms of all sizes continue to evaluate their businesses and how they fit into the future landscape of the asset management industry. We aim to be the consolidator of choice given our experience and the benefits offered by our integrated multi-boutique business model.

Our M&A pipeline remains strong and we continue to have focused conversations with investment managers that fit our platform and we are very excited about the prospects for our M&A activity in the coming quarters and years.

Now we will turn to Slide 7. The foundation of our business is built on the four key pillars that you see here, which exemplify our culture and our commitment to our clients. Our commitment to these pillars has developed to create a very unique employee ownership culture that we believe serves as a key driver of our success both today and in the future. We are very proud to report that our current base of 264 employees has more than $100 million investment in the products that we manage. We invested full fees alongside our clients, so we are clients as well. This is all done by personal choice, not by any type of corporate mandate to do so. As a result our interest and our client's interests are aligned.

Let's turn to Slide 8. This slide illustrates the diversification from multiple perspectives, including by business, distribution channel, by product type and by asset class. That's important when we think of the health and sustainability of the business through our market cycles. Approximately 56% of our AUM is from institutional clients and 44% from retail clients, as of the end of the quarter. We expect our two planned acquisitions to significantly enhance the diversification characteristics of our platforms to expansion of our investment capabilities products and distribution system.

Slide 9, provides a snapshot of our scorecard, which we believe provides strong evidence that our unique culture and platform are working for investment franchises and in turn for our clients.

Slide 10, illustrates our short and long-term outperformance relative to benchmarks. Some select examples that I would like to highlight at the investment franchise level include Sigmore Capital, RS International, Encorp and Munder all of which have one or more funds ranked in the top quartile by Morningstar for the trailing one year period ended December 31, 2018.

Additionally, I'd like to call the strength of our overall three and five year performance track record, as most clients use these timeframes when evaluating whether to hire and also retain investment managers. The results delivered by our Victory shares platform are also compelling with 57% of our ETS ranked in the top quartile over the trailing one year.

Five year ETS will rank in the top decile by Morningstar over the one year period and three will ranked in the top decile over the three year period.

Looking at our mutual funds in ETFs on Slide 11. 65% of AUM in those products was ranked four or five stars by Morningstar on an overall basis for the period ended December 31, 2018. 56% of AUM was ranked four or five stars over three years, 64% over five years and 72% over 10 years. All momentum that we continue to achieve with our solutions platforms particular with Victory shares ETF. Since we introduced ETFs in our platform in 2015, our ETFA has grown from 198 million to 3 billion as of December 31, 2018. At the end of December 2018 Victory shares is ranked 26 in overall ETF AUM among 144 issuers and 21st out of 144 ETF issuers in year-to-date net flows according to MorningStar. Year-over-year our ETF market share has increased by 33%.

Before we move into our financial results, I would like to briefly discuss an organizational change we'll be implementing over the next month. Michael Policarpo our Chief Operating Officer, will be promoted to our President, Chief Financial Officer and Chief Administrative Officer. Current Chief Financial Officer Terry Sullivan will be leaving the firm. Mike has been with Victory Capital for 14 years and has served in various senior capacities over his tenure, including our prior Chief Financial Officer before Terry's arrival.

Mike’s institutional knowledge, experience and direct involvement in the sourcing and execution of our acquisition strategy positions him very well for seamless transition into this new role. Terry has been a valued contributor to our company over the last few years as our Chief Financial Officer. For many years prior that he was a trusted advisor to me while at a previous firm. We wish him well in his next career opportunity and know he will stay a friend of the firm and to me personally.

Now I will turn over to Terry to discuss our financial results for the quarter.

[Terry Sullivan, Chief Financial Officer]

Thanks David for your kind words. Mike I wish you the best of luck and I'm committed to a smooth and seamless transition. I would like to add to Dave's comments that I truly enjoyed my tenure at Victory. We have accomplished a lot strategically, organizationally and financially over the past couple of years. I am proud to have been part of an exceptionally talented team. I'd be up most confident that Victory is on path for tremendous success in the future and agree with Dave's comments that with the long-term previous relationship and what we have accomplished together that I will always be a friend of this firm.

The financial results review for the fourth quarter 2018 begins on Slide 14. AUM ended the period at 52.8 billion this is a decrease of 17% in the quarter in which we experience extreme market volatility that resulted in negative market action and net outflows and thus impacted our P&L. Revenue decreased 11% to 96 million quarter over quarter and is down 9% from the fourth quarter of last year.

Our EPS was $0.38 down 3%, 16% from 4Q17 and 3Q18, respectively. And our EBITDA margin was 37.9%, flat to 4Q17's measure and down 220 basis points from 3Q18's measure. Overall, we believe we did a good job of executing against our financial plan in a quarter that was preceded by record results in the third quarter and where we saw unprecedented market volatility a severe market pullback and challenging environment for the investment management sector.

Though the challenging markets impacted our quarterly results we were pleased with the progress we made against our full year-over-year financial goals. Taking a longer-term viewpoint Victory Capital was demeasurable full year-over-year growth across revenue, EBITDA, adjusted net income with tax benefit and EPS. More specifically EBITDA margin expanded 230 basis points and A&I with tax benefit grew 41% from 2017 reflective of both operating and capital management leverage existing in our business.

We believe our results punctuated theme Dave mentioned earlier, which is our integrated multi boutique model is durable and built for these types of environments. Furthermore the announced acquisition of Harvest and USAA Asset Management provide proof points of the powerful M&A capability and value proposition on model offers and what we view as an industry with continuing consolidation on the horizon.

On the capital management front, we earmarked capital for our M&A growth strategy with Harvest and USAA asset management acquisitions. We can continue to return capital to shareholders with our ongoing share repurchase program, and we accumulate cash as part of our acquisition financing strategy.

Our cash balance is 51.5 million and our term loan B debt outstanding is 280 million. Our net debt to EBITDA ratio dropped to 1.5 times from 1.6 times in the prior quarter. We repurchased approximately 499,000 shares over the course of the quarter, which represents a 70% increase quarter-over-quarter.

Finally, we generated cash flow of 34.4 million in the fourth quarter, delivering a free cash flow yield that is amongst the leaders in our peer group.

Slide 15, provides a snapshot of our AUM over time. Our AUM decreased 17% from 3Q '18, primarily from market action and some outflows. Focused asset classes are currently 78%, and we continue to see the benefits of our purposeful commitment to these strong performing value-added in demand higher fee and higher margin asset classes. Our mutual fund and ETF AUM finished the fourth quarter at approximately 33.4 billion in AUM including 3 billion in ETFs. We continue to operate a well diversified platform relative to our AUM size and are quite pleased with our scale and growth potential.

Slide 16, provides a perspective on our organic growth performance over the last several quarters. 4Q outflows were 1 billion resulting from a few key factors. Outflows accelerated in December as extremely markets led some investors to the sidelines, resulting in higher than expected outflows in several asset classes. This investor move to the sidelines intensified in December, and as such the Victory move from a quarterly net flow positive position through November to an outflow position in December.

With that said, we continue to have success in select asset classes and with several franchises. Our ETF business Victory shares have positive net flows of 121 million in the fourth quarter, brining full-year 2018 net flows to 1.1 billion. We continue to be pleased with the strong momentum and market share gains we're seeing in Victory shares, and note that we've experienced positive net flows every quarter since our acquisition of the business in 2015.

Global non-US posted positive inflows of 659 million and 1.5 billion for the quarter and full year respectively, primarily driven by strong results in our Trivalent investments and service capital franchises. We continue to see encouraging progress among our future flow leaders, most notably Victory shares, Trivalent, RS Growth, Sycamore and Sophus.

Lastly, our separate accounts in other channel posted 367 million for fourth quarter close. Reflecting to the positive momentum, we have with institutional clients in turbulent marketing conditions. We're pleased with our gross sales results of 4 billion for the quarter and 14.1 billion for 2018, as they provide evidence of the strength of our distribution platform, attractiveness of our investment strategies and competitiveness of our investing performance.

Growth sales for the quarter were up 1.1 billion or 39%, when compared to the prior quarter. While the fourth quarters market volatility create an extremely challenging investment environment and drove sizable investor outflows across the industry, we feel confident that our franchises are navigating the markets on behalf of our clients effectively.

Furthermore with these market conditions from opportunities to outperform and gained market share by leveraging our attractive asset classes and strong consistent relative performance. As we look forward, we believe our franchises continue to provide us with a strong foundation for organic growth as supported by a high quality pipeline across several franchises and distribution channels.

Slide 17, provides a snapshot of quarterly revenues. Quarterly revenues decreased 9% year-over-year and 11% from the third quarter, reflecting average AUM decreases from the fourth quarter market decline and fee rate decreases resulting from asset mix shift. We ended the full year 2018 up modestly in our revenues from 2017 levels.

Turning to Slide 18, expenses decreased 15% year-over-year reflecting lower AUM and revenues levels that reduced variable costs, operational efficiencies driven by our integrated platforms and lower interest expense resulting from our debt refinancing and deleveraging efforts. Expenses decreased 5% quarter over quarter, driven by decreases across personnel and operating expenses that were partially offset by transaction related costs. Personnel expenses decreased 11% quarter over quarter and 9% year-over-year. Operating expenses decreased 5% quarter over quarter and 12% year-over-year, driven by the impact of lower AUM revenue levels on variable costs reductions in broker dealer distribution expense and platform distribution fees and continuing runoff of legacy intangible amortization.

Non operating expenses increased by 2.4 million from the third quarter related to two non-cash items. Year-over-year non operating expenses were down 43%, primarily driven by reduced interest expense resulting from our debt refinancing and deleveraging efforts, partially offset by the previously mentioned two non-cash items. Lastly, our controllable expenses with our integrated multi boutique model were essentially flat again quarter over quarter, which enabled us to effectively buffer industry wide margin pressure resulting from market volatility. I would point out that our ability to prudently manage or controllable cost has not impaired our ability to invest our platform for the future as we make great strides enhancing our technology, marketing and distributing capabilities over the last few years to support our business growth.

We present our non-GAAP earnings, EPS and margins metrics on Slide 19. EPS decreased 3% year-over-year and 16% quarter over quarter driven by reduced quarterly revenues and EBITDA resulting from the market downturn. Full year 2018, A&I with tax benefit and EPS grew 41% and 20%, respectively from 2017 levels, primarily driven by higher revenue, EBITDA margin expansion, reductions in our interest expense and lower tax expense related to the 2017 Tax Cuts and Jobs Act, partially offset in the case of EPS by share issuance related to our 2018 IPO.

Adjusted EBITDA was 36.4 million down 9% year-over-year and 16% from 3Q18. We’re able to maintain a high 30s adjusted EBITDA margin percentage throughout 2018, including in the volatile fourth quarter, a level that positions us amongst the leaders in the industry and provides another proof point of the scale and power of our integrated model.

Turning to capital management, Slide 20 outlines several key balance sheet items and metrics. Overall we believe we delivered on our balanced strategically aligned approach to capital management. We developed the fully committed debt financing strategy with our relationship bank partners for the Harvest and USAA, asset management acquisitions that we believe is optimized for shareholder value creation. Our net debt balance stands at 236 million, yielding a net debt to credit EBITDA ratio of 1.5 times. We have 51.5 million in cash as we accumulate cash to finance the acquisitions. We continue to execute on our share repurchase program by buying in approximately 499,000 shares over the course of the quarter which represents 70% increase quarter over quarter.

As we said before, we feel the buyback program demonstrates softness and proactiveness on the capital management front, reflects our confidence in our long-term business strategy as a useful tool to have in the toolkit to drive long-term shareholder value. We generate strong cash flow from operations of 34.4 million in the fourth quarter, which enables us to strike the right balance across our capital management priorities and apply the free cash flow yield for Victory Capital amongst the leaders in our peer group.

This concludes our prepared remarks. I would now like to turn the call over to the operator for questions.

[Operator]

[Operator Instructions] Our first question comes from Michael Carrier with Bank of America Merrill Lynch. Your line is open.

[Shaun Calnan, Bank of America Merrill Lynch]

Good morning, guys. This is actually Shaun Calnan on for Mike. Just on the transition, given Terry's extensive background in M&A, should we expect less acquisition activity in the near term as Mike transitions into the new role?

[David Brown, Chairman and CEO]

No, Mike has been with us for 14 years and has been involved in really every aspect of the transactions from the sourcing perspective, from an integration perspective, from a closing perspective, I wouldn’t at all assume because Terry is moving on that we would change our acquisition philosophy or really how we're positioned in the market to grow inorganically.

[Shaun Calnan, Bank of America Merrill Lynch]

And then I just had one on the management fee rate. So it's a little bit more than expected in the quarter and we're just wondering if that was mostly driven by mix and if they could potentially recover a bit going into this quarter with the strong quarter to date market?

[Terry Sullivan, Chief Financial Officer]

Yes, I would say that as you think about the fee movement it is driven by asset mix shift that if you think about it was a bit magnified in the fourth quarter given the volatility. I think it's important to focus on mix shift versus erosion because this is truly what we were seeing here it's about the asset classes that we're having momentum in and I would also say that it is not a permanent movement. We have asset classes and therefore fees that range quite broadly as we've discussed in the past and we have seen and would expect to see momentum in some of those asset classes that have higher fees and therefore could move in the other direction.

[Operator]

Thank you. Our next question comes from Ken Worthington with JP Morgan. Your line is open.

[Will Cuddy, JPMorgan]

Good morning, this is Will Cuddy signing for Ken. First Terry it's been great working with you best of luck in your next role and Mike congratulations on the role change. During the questions could you please provide USAA AUM at the end of the year and what is available and basis in the market movements how should we be thinking about we be thinking about any potential or revisions expectation for synergies. Sorry for accretion relative to what you provided in the fall?

[Terry Sullivan, Chief Financial Officer]

Sure, it's Terry Will and thanks for your kind words and wishes. Let me maybe talk a little bit about or holistically about the transaction and the financial update. It's important to consider the framework that were operating in, and remember and we set forth some guidance earlier on we're more than doubling the AUM revenue and EBITDA of the business, it also is bringing significant diversification and scale, which has driven the strategic and financial thesis, and also has been transformative to our financial profile. Dave mentioned earlier that the business as well as Harvest for that matter are both performing as expected. Obviously, the market volatility has had some impact, but has not changed the long-term view and thesis that we have both strategically and financially on the acquisitions.

In terms of thinking about the numbers, best way to frame it is to and the way we're thinking about it at least is really a revised starting point on AUM, and so we provided specific guidance around pro forma EBITDA of 420 million, as we look at the market at the end of the year we would estimate that that number has decreased call it 5% to 7%. However, I would note that the recovery in January has been significant and gives us comfort that we're trending well against overall goals. As it pertains to EPS guidance, we would say that our guidance that we provided remains unchanged, we’re still in the same range actually and probably the numbers have bounced up a few points just the way the math works, call it a denominator effect where Victory the core existing business has a little bit more exposure to the equity markets relative to the other businesses.

[Will Cuddy, JPMorgan]

And will be possible, AUM number for the end of the year or take 5% to 7% down.

[Terry Sullivan, Chief Financial Officer]

I think the 5% to 7% to clear is on EBITDA, we’re not providing guidance on AUM, we certainly will be back with that information holistically when we have more information to provide.

[Will Cuddy, JPMorgan]

And then turning to some of the organizational changes, Mike and Terry could you maybe talk about how you split responsibility on both the Harvest and USAA transactions and how would you characterize the respective focuses on each transaction.

[Terry Sullivan, Chief Financial Officer]

I will start it's Terry again. I would say its complete partnership as we talked about in the past we are M&A is a core driver of our business, but we are first and foremost operators of the business and if you have that foundation it really makes for group of executives that work seamlessly across the various elements that come with really sourcing, evaluating, diligent seeing and ultimately executing M&A that starts at the beginning and it carries to announcement and after that, that's where a lot of ways the operators real work begins from an integration standpoint which goes without saying needs to be seamless and fully partnered.

[Mike Policarpo, Chief Operating Officer]

I would add that Terry and I have worked very closely on both the Harvest and the USAA transaction. From the beginning through now through execution and then I think it has been a very seamless partnership we worked together.

[David Brown, Chairman and CEO]

And the last part it's David I would say the organizational change has been thought about and I would say that we don’t see any issues at all and any issues impacting the closing or the integration of Harvest or USAA at all. And we feel really confident about that.

[Operator]

Our next question comes from Kenneth Lee with RBC Capital Markets. Your line is now open.

[Kenneth Lee, RBC Capital Markets]

Just want to echo my thought, good luck Terry, it's been great working with you and congratulations again Michael. In terms of the Harvest you mentioned that there was a drawdown in the fourth quarter, which would you be able to quantify that and maybe remind us again how the flagship strategies would typically perform in terms of client demand in volatile markets. Thanks.

[Terry Sullivan, Chief Financial Officer]

So let me take the two pieces of that question. Let me first say that our thesis on Harvest that it is a value added portion of a well diversified portfolio has not changed we're very excited about what Harvest's product set brings to not only our product set but to our client's product sets, potential clients' products sets, their flagship strategy and they have multiple strategies but their flagship strategies performed very similar to what the benchmark is and how they bench themselves, it did have a slight investment drawdown they did see some outflows in the fourth quarter, but have recovered very, very nicely in January, from a flow perspective as well as from a performance perspective.

[Kenneth Lee, RBC Capital Markets]

And then in terms of the global non-US equity flows. You mentioned briefly about strong performance within Trivalent and Sophus. So I'm wondering whether there were any particular sizable institutional inflows that were driving the strengths in the flows in the fourth quarter?

[David Brown, Chairman and CEO]

So we've had several mandates that have been awarded to us with both of those franchises, we did see a sizable mandate one within Sophus, but we we're very excited about that asset class, we have really good investment franchises with really good investment performance over the short and long-term and we have lot of overcapacity there. And as you noted, we are seeing positive flows there and we think that those two franchises will be contributing to really our transition to the future flow leaders as we think about organic growth opportunities in the future.

[Operator]

Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

[Michael Cyprys, Morgan Stanley]

Just wanted to see if you can elaborate a bit further on the high quality pipeline that you're seeing you mentioned some wins were pushed into 2019. If you could help quantify that, talk a little bit about the pipeline of both the institutional side and also if you could talk a little bit about the retail side so that the initiatives there with the different channels?

[David Brown, Chairman and CEO]

Won but not yet funded accounts we don’t control the timing obviously the clients do. We've been notified by a number of potential clients that they are going to award us mandates, we worked through contracts and completed the contracts in a weighted, and really we are waiting for the clients to award us the dollars, there is significant there with a few franchises and we anticipate them to fund within the first half of 2019, they really are not specific to any channel. I would point out that maybe where we've seen the most momentum is in the sub-advisor channel, we feel that that's the channel where we have grown and we continue to grow and it happens to be where some of our won, but not yet funded is.

On the retail side for your question on the retail side, we continue to see great progress with our ETFs with Victory shares as we've noted on -- the growth in that part of our business since we bought into the business in 2015. That is integrated into our platform from a sales perspective, from an operational perspective. So it's really part of our business, it's not a separate business, we've seen really good opportunities there and then I would say for a number of our franchises in our focused asset classes you have small cap -- we feel like our performance has really driven us to an opportunity to grow in the retail side with those products.

[Michael Cyprys, Morgan Stanley]

And then just a follow-up, I think you had mentioned the USAA board had approved some of your franchises to provide asset management services. Can you quantify how much AUM that has been approved there and how much you're baking in to your accretion guidance related to that and just how you are thinking about the opportunities at longer term for that.

[David Brown, Chairman and CEO]

So let me start off and say that any of our franchises participating in a multi-manager product and the removal of one of the sub-advisor is really net into our synergies number. So it will, it's in that $100 million synergy number that we had stated earlier, which is on track and really on time, we don't have a dollar amount and AUM amount, what was approved was the ability to be participate in the multi-manager products, but we don't have a specific dollar amount as we get closer or as we close we will share that with you but that is not final at this point.

[Operator]

Our next question comes from Robert Lee with KBW. Your line is now open.

[Jeffrey Drezner, KBW]

This is Jeffrey Drezner on for Robert Lee. Thank you for taking my question. I was wondering if you can give us an update on flows for Victory since the quarter end.

[David Brown, Chairman and CEO]

We did update for January AUM, we don’t update for flows intra quarter, but I would go back to my prepared remarks to say that the operating environment the flow environment for us is normalized and I will go back to the comments we said about our pipeline and our won but not yet funded accounts.

[Jeffrey Drezner, KBW]

And then about expected cost or savings in regards to the move to San Antonio and how we can think about that.

[Terry Sullivan, Chief Financial Officer]

I would say couple of things about the relocation, first we reiterate some of the remarks that we made in January press release about the strategic nature of that development. As it pertains to financial consequences I would say a couple things, the operating costs associated with the relocation are effectively baked into 100 million synergy number that we previously disclosed. There is probably an inherent question around tax consequences there as well and what we say right there that we've done some preliminary work. We do see that there is potential positive impact but again its preliminary and likely marginal as taxes at that level our portion is driven from a revenue standpoint.

[David Brown, Chairman and CEO]

It's Dave I would add just a few things to that. Victory moving it's headquarter to San Antonio is all about the future. It really is going to allow us to cost-effectively build out our operational infrastructure while also really being able to recruit top talent and maintain our talent. The idea of having a city where we can recruit technology people, operational people is we feel really gives us a leg up on the competition to recruit top talent.

[Jeffrey Drezner, KBW]

Thanks you that’s helpful. And just one more, is there anything to quantify the pipeline of won but not funded business.

[David Brown, Chairman and CEO]

We don't quantify but I would say that we feel like it impactful to our flow picture.

[Operator]

Thank you. Our next question comes from Chris Shutler with William Blair. Your line is now open.

[Chris Shutler, William Blair]

I just want to confirm, Dave I think you said which is the sub-advisory changes were already in the synergy estimates.

[David Brown, Chairman and CEO]

Correct.

[Chris Shutler, William Blair]

Okay. And then thinking about the M&A pipeline more broadly I think you said it's still active but can you talk about how you are thinking about leverage in the current environment and just having USAA and that direct distribution channel change at all how you think about M&A in other words might you be willing to look at some even smaller managers because you could plug them into that distribution network?

[David Brown, Chairman and CEO]

Yes, let me take -- start off with your last part of your question about M&A and the direct channel. In general as I said in my prepared remarks, we are still having a lot of conversations, focused conversations. We feel like we're very well positioned if not the best position in the industry to take advantage of the consolidation that is happening and we can quantensify as we move forward in the future quarters and years. Our platform the integrated multi-boutique as we've spoken to a number of potential partners really is attractive with what as how the industry is shaping out. The direct channel will allow us to potentially look at smaller managers that could be -- maybe encaged in our structure today, we would not look at, it will open up maybe some smaller managers that we would speak to. So I would say yes on that. And as far as the leverage Terry maybe do you want to go through that.

[Terry Sullivan, Chief Financial Officer]

Yes, sure. I think in summary, we would tell you that were comfortable with our overall financing plan and comparable with our leverage levels as we do think it optimize it's optimized for driving shareholder value. And there is a number of reasons that underpin that view. First of all as Dave mentioned earlier, the financing is fully committed and secured so from an execution standpoint, we are ready to go and that's important. I'd also point to the pro forma financial profile of this business, the attributes, the diversification. If you think about it then in the context of the fourth quarter, we would effectively we think performed very well in somewhat stressed environment, which also is important when you think about leverage. The pro forma financials that we will be looking at -- offer a very powerful free cash flow yield, and we combined that with our history of deleveraging and the discipline and prudence that we demonstrated there, we think that there's a nice glide path and trajectory from a deleveraging standpoint. We've been accumulating cash as we go towards the month -- through the months towards closing, which will also contribute. And if you think about some of the numbers that we're broadly giving guidance on around that 420 I mentioned earlier we don’t see a material move in the debt to EBITDA ratio that we had previously disclosed. And again, we'll see how things evolve there is obviously a positive tilt in January that bodes well for the future and as we march towards closing.

[Operator]

Thank you. And I'm showing no further questions at this time. I like to turn the call back over to David Brown for closing remarks.

[David Brown, Chairman and CEO]

Thank you. Thank you for taking the time today to participate in our earnings call. If you have any additional questions please don't hesitate to contact us, and we look forward to updating you on our progress in the future. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day.